The good news is:
• New lows declined on Friday.
The negatives
The market set some records last week as it fell every day through a seasonally strong period. As of last Friday the NASDAQ 100 (NDX) and the S&P 100 (OEX) have both been down for 10 consecutive days, a first for the NDX and the second time for the OEX. The OEX ended its only previous stretch of 10 consecutive down days on April 4, 1994, rallied 2.4% in 3 days then fell to its low for the year on April 19.
New lows hit some pretty serious numbers last week, peaking on Thursday at 151 on the NYSE and 257 on the NASDAQ. Although all of the major indices were down on Friday, new lows on both exchanges were about half of what they were on Thursday (that is a positive).
The chart below covers the past 6 months showing the NASDAQ composite (OTC) in blue and a 40% trend (4 day EMA) of the ratio of NASDAQ new highs to new highs + new lows (OTC HL Ratio) in red. Dashed horizontal lines have been drawn at 10% levels of the indicator; the line is solid at the neutral 50% level. Dashed vertical lines have been drawn on the 1st trading day of each month.
OTC HL Ratio is now at its lowest level since the March 2009 lows.
The next chart is similar to the one above except it shows the S&P 500 (SPX) in red and NY HL Ratio in black has been calculated from NYSE data.
NY HL Ratio is a little stronger than OTC HL Ratio, but still negative.
The positives
The positives are all short term. Many of the indicators are at their lowest levels since the March 2009 lows suggesting a rally is overdue.
Like the week before, last weeks sell off was on declining volume and new lows declined sharply on Friday.
The chart below, an update of one shown last week, covers the past 6months showing the SPX in red and a 5% trend (39 day EMA) of NYSE downside volume (NY DV) in brown. NY DV has been plotted on an inverted Y axis so increasing NY DV moves the indicator downward (up is good).
NY DV has held well above its May lows while the SPX went to a new low.
The chart below is similar to the one above except it shows the OTC in blue and OTC DV calculated from NASDAQ data is shown in brown.
OTC is also well above its May lows and even turned slightly upward on Friday.
Seasonality
Next week includes the 4 trading days prior to the 2nd Friday of July during the 2nd year of the Presidential Cycle.
The tables below show the return on a percentage basis for the 5 trading days prior to the 2nd Friday of July during the 2nd year of the Presidential Cycle. There are 0's on Monday's when, like this year, the market was closed. OTC data covers the period from 1963 - 2009 and SPX data from 1953 - 2009. There are summaries for both the 2nd year of the Presidential Cycle and all years combined. Prior to 1953 the market traded 6 days a week so that data has been ignored.
Over all years, average returns have been modestly positive. Large losses for the OTC in 2002 and 2006 have made average returns during the 2nd year of the Presidential Cycle negative in spite of being up 55% of the time.
Report for the week before the 2nd Friday of July.
The number following the year is the position in the presidential cycle.
Daily returns from Monday to 2nd Friday.
| OTC Presidential Year 2 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1966-2 | 0.00% | 0.30% | -0.09% | 0.64% | 0.60% | 1.45% |
| 1970-2 | 0.55% | -0.48% | 1.04% | 1.80% | 1.93% | 4.84% |
| 1974-2 | -3.55% | -0.52% | -1.09% | -0.24% | 2.84% | -2.56% |
| 1978-2 | 0.17% | 0.38% | 0.38% | 0.12% | 0.95% | 2.00% |
| 1982-2 | 0.00% | -0.49% | -0.67% | -0.76% | 0.76% | -1.16% |
| 1986-2 | -1.72% | -1.59% | 0.27% | 0.49% | -0.14% | -2.68% |
| Avg | -1.14% | -0.54% | -0.02% | 0.28% | 1.27% | 0.09% |
| 1990-2 | 0.25% | -0.15% | 0.64% | 0.70% | 0.27% | 1.71% |
| 1994-2 | 0.00% | -0.46% | -0.37% | 0.79% | 0.13% | 0.09% |
| 1998-2 | 1.16% | 0.15% | 1.33% | 0.31% | 0.41% | 3.35% |
| 2002-2 | -2.95% | -1.74% | -2.54% | 2.11% | -0.07% | -5.19% |
| 2006-2 | -0.62% | 0.56% | -1.81% | -1.73% | -0.82% | -4.41% |
| Avg | -0.54% | -0.33% | -0.55% | 0.44% | -0.01% | -0.89% |
| OTC summary for Presidential Year 2 1966 - 2006 | ||||||
| Avg | -0.84% | -0.37% | -0.27% | 0.38% | 0.63% | -0.23% |
| Win% | 50% | 36% | 45% | 73% | 73% | 55% |
| OTC summary for all years 1963 - 2009 | ||||||
| Avg | 0.04% | -0.12% | 0.31% | 0.28% | 0.36% | 0.86% |
| Win% | 68% | 49% | 59% | 66% | 74% | 66% |
| SPX Presidential Year 2 | ||||||
| Year | Mon | Tue | Wed | Thur | Fri | Totals |
| 1954-2 | 0.00% | 1.12% | 0.07% | 0.00% | 0.67% | 1.85% |
| 1958-2 | -1.27% | -0.07% | 0.31% | 0.66% | 0.48% | 0.12% |
| 1962-2 | 0.68% | 1.15% | 0.93% | 0.52% | -0.34% | 2.93% |
| 1966-2 | 0.00% | 0.25% | 1.44% | 0.37% | 0.26% | 2.32% |
| 1970-2 | -0.12% | -0.08% | 1.09% | 1.48% | 1.77% | 4.13% |
| 1974-2 | -3.07% | 0.48% | -1.83% | -0.13% | 4.08% | -0.46% |
| 1978-2 | 0.40% | 0.69% | 0.32% | 0.01% | 1.38% | 2.81% |
| 1982-2 | 0.00% | -0.33% | -0.07% | 0.29% | 1.21% | 1.10% |
| 1986-2 | -1.70% | -1.87% | 0.58% | 0.45% | 0.12% | -2.41% |
| Avg | -1.12% | -0.22% | 0.02% | 0.42% | 1.71% | 1.03% |
| 1990-2 | 0.31% | -0.84% | 1.33% | 1.17% | 0.51% | 2.47% |
| 1994-2 | 0.00% | 0.04% | -0.05% | 0.50% | 0.26% | 0.75% |
| 1998-2 | 0.08% | 1.06% | -0.24% | 0.78% | 0.23% | 1.91% |
| 2002-2 | -1.22% | -2.47% | -3.40% | 0.75% | -0.64% | -6.98% |
| 2006-2 | 0.15% | 0.41% | -1.09% | -1.30% | -0.49% | -2.32% |
| Avg | -0.17% | -0.36% | -0.69% | 0.38% | -0.03% | -0.83% |
| SPX summary for Presidential Year 2 1954 - 2006 | ||||||
| Avg | -0.58% | -0.03% | -0.04% | 0.43% | 0.68% | 0.59% |
| Win% | 50% | 57% | 57% | 85% | 79% | 71% |
| SPX summary for all years 1953 - 2009 | ||||||
| Avg | 0.01% | -0.03% | 0.23% | 0.14% | 0.26% | 0.60% |
| Win% | 59% | 46% | 57% | 61% | 67% | 65% |
Money Supply (M2)
The money supply chart was provided by Gordon Harms. Money supply growth has been leveling off.
Conclusion
The market went from oversold to extremely oversold last week. A bounce of some kind is overdue.
I expect the major averages to be higher on Friday July 9 than they were on Friday July 2.
Last weeks positive forecast based on the expectation of a bounce during the seasonally strong period was a miss. This report is free to anyone who wants it, so please tell your friends. They can sign up at: http://alphaim.net/signup.html.
In his latest newsletter, Jerry Minton announces a new investment service for 401(k) participants. To read about it and the retirement crisis facing American workers, go to www.alphaim.net. There's a free sign-up on the home page.
Thank you,
